5 Factors Affecting Gold Prices in 2017

Most investors see gold as a safe investment option that can help them in a financial crisis. However, with various macroeconomic and political factors having a say on the prices, the lure of gold as an investment medium has lost some of its sheen over the last few years as can be seen from the prices that have remained tepid for some time now. Nonetheless, gold remains a fall-back investment option for most investors and it is expected to help reap good returns in the long-term. To understand how gold prices will move in this year, we need to understand the various factors that may have a say on its demand.

In this post, we look at 5 factors that may affect gold prices in 2017.

Divergence Among Central Banks

The US Federal Reserve is increasing its interest rates while other central banks are keeping their rates low and/or printing more money. Experts predict that the US Fed may increase its rates further at least three times in 2017. On the other hand, central banks like the Bank of Japan and the European Central Bank have set their rates below zero in the negative territory. Such differences in central bank policies lead to uncertainties and are a major reason for high volatility. It is likely that the investors will seek refuge in gold to counter the volatility and its prices may rise.

Increasing Gold Reserves of Central Banks

After the last global financial crisis of 2008-09, central banks have started to aggressively buy gold. They are expected to continue doing so in 2017 considering that they purchased 271 tonnes of gold in the first three quarters of 2016. Central banks do this as gold reserves reduce volatility in their foreign reserves and increase their buying power. This may be another reason for a gold price hike in 2017.

Volatile Currency Market

Currencies from major developed countries have been witnessing drastic ups and downs. Till 2016, the Japanese Yen, British Pound, Canadian Dollar and the Euro have seen huge positive and negative swings. Though the US dollar has managed to improve its value but it alone cannot be the deciding factor in keeping the currency market steady. Reduced currency values will lead to higher demand for gold and may automatically cause gold prices to rise.

Instability of the EU

The Brexit will influence the EU bloc considerably once it takes effect. The recent Italian constitutional referendum and the resignation of Italian PM clearly demonstrate the shakiness of the country’s political climate. In addition, the Eurozone will be a spectator to a series of elections in countries like Germany, France and Netherlands in 2017. The emergence of a party that counters a united Europe in any of these countries will be difficult to handle in the short term, and will lead to increasing political problems. In such potentially chaotic situations, it is obvious that investors will seek security in gold. This will lead to the rise in demand and hence in its price.

Reduced Gold Consumption of China

According to the World Gold Council, China has witnessed a fall in gold demand. The overall gold demand from the country has dropped 22% from the 2015 levels. Demand has also gone down in India, where it has dropped 28%. Such factors will reduce the gold rates in India as well as in China. However, experts believe that gold demand in India will be steady in 2017 as the market has been affected immensely by the demonetisation and people are likely to trust gold as a safer investment in times of uncertainty.